The COVID-19 pandemic has caused significant burdens for employers and employees alike. While some businesses struggle to survive, others are fortunate enough to be in a position to help employees as they face hardships created by the crisis. Many employers in the latter category are looking for ways to best help employees who are facing financial difficulties as a result of the pandemic.
One possible approach for these employers is a disaster relief fund under Section 139 of the Internal Revenue Code. Section 139 disaster relief funds allow employers to make qualified disaster relief payments to employees to help with certain expenses they incur as a result of a qualified disaster.
Tax status of COVID-19 disaster relief funds
On March 13, 2020, President Trump declared the COVID-19 pandemic to be an emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Although this declaration does not strictly fall within the definitions of “disaster” and “qualified disaster” in applicable Internal Revenue Code sections, the IRS has taken the position that a disaster includes an event declared a major disaster or an emergency. Therefore, if a disaster relief fund is properly structured, payments under such a fund are likely excludable from recipient employees’ taxable income for federal tax purposes. The payment also will be excluded from taxable income in most states and will not be subject to employment taxes.
Scope of qualified disaster relief payments
Code § 139 defines “qualified disaster relief payments” to include payments for several possible types of expenses incurred as a result of a qualified disaster. In the context of the COVID-19 emergency, qualified disaster relief payments would include amounts paid by an employer to an employee for the employee’s reasonable and necessary personal, family, living or funeral expenses incurred as a result of the COVID-19 emergency. Payments to replace lost salary or wages will not qualify for favorable tax treatment under Code § 139.
Although Code § 139 does not set forth specific expenses that will qualify (other than funeral expenses), the following likely fall within the scope of qualified expenses:
- Expenses incurred in working from home as a result of the pandemic
- Additional or unexpected dependent care expenses incurred as a result of the pandemic
- Increased commiting costs resulting from a lack of access to public transportation
- Unreimbursed medical expenses incurred for treatment of COVID-19 or its symptoms
- Other extraordinary expenses resulting from an employee’s exposure to COVID-19, such as expenses for products to sanitize the employee’s home
Disaster relief fund requirements
There is little formal guidance on how disaster relief funds must be structured and what requirements such funds must meet. Although it is not strictly required, it is prudent to set forth the terms of a disaster relief fund in a written document or policy. Among other things, the document or policy should describe the scope of the policy, the duration of the disaster relief fund, eligibility requirements for receipt of disaster relief payments, procedures to apply for payments, the timing and method of making payments, and limits on the amount of payments, if any.
In order to receive favorable tax treatment under Code § 139 for payments they receive under a disaster relief fund, employees need not be required to provide proof of actual expenses. However, the employer providing the payments should take steps to ensure that the payments are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary qualifying expenses. To meet this standard, the employer should, at a minimum, require employees to certify that they have incurred or will incur qualifying expenses and that the amount of payments that they will receive under the fund are reasonably expected to be commensurate with the amount of their qualifying expenses. In addition, employees should certify that the expenses are not reimbursable under any other plan, program or insurance policy.
A properly structured disaster relief fund will not be subject to ERISA. Therefore, it need not contain formal claim and claim review procedures. However, employers should consider adopting some basic administrative procedures to ensure that requests for payments from the fund are proper. In addition, employers should consider whether employees will have the ability to appeal denied payments. Appeals will add to the complexity of administering a disaster relief fund, which may not be desirable in a time of crisis. However, it can provide an added measure of protection in the event that payment requests are denied.
Link to COVID-19 Resources page
 The recent delay of the April 15 tax filing deadline is one example of this position.